Assessing the Trump effect: Q&A with Mary Rosenbaum

With Donald Trump already making waves in the White House, we ask Mary Rosenbaum, managing director at macroeconomic policy advisory, Observatory Group, what to expect from his presidency.

Will Trump the President be as belligerent as Trump the campaigner?

His disposition is set and he’s not going to change his way of approaching issues. He’s going to continue to communicate his opinions in a distinctive and direct fashion.

But it’s far from clear how much he will be able to accomplish in terms of changing legislation. It’s important to understand how much authority the president actually has. The constitution grants most of the authority to the legislature. Over many years Congress has delegated some authority to the president on various issues including trade, immigration and regulation. And these are areas where Trump has very strong views.

It is important not to underestimate what authority a US President has on some of these issues, but it is also important to recognise that on some extremely important issues, especially on taxation and economic policy, that changes in regulation are required to change policy. So it’s a mixed bag.

Will we see him going through with his trade threats or will he begin to back off?

The president can impose temporary tariffs of up to 150 days on goods as specific as coated papers or golf carts. But he can’t impose a broad tariff against all goods from a particular country. Furthermore, making the tariffs permanent requires congressional action.

As far as advancing his protectionist agenda is concerned, we believe Mr Trump has the executive authority to notify Canada and Mexico of his desire to renegotiate terms of the North American Free Trade Agreement (NAFTA). But I don’t think he is going to request a unilateral withdrawal.

He has not been specific about what he would want such a renegotiation to achieve. We know he’s interested in the auto industry, so we would look for him to negotiate new terms on which firms in the other two countries could access the US market for either parts or fully assembled vehicles. But in the 23 years since NAFTA came into force, the three economies have become much more integrated. That will be difficult to untangle quickly and without cost. It’s unclear he will be able to improve the US’ advantages without high offsetting costs that might extend into the medium term.

Initially Trump is more likely to look for other mechanisms, for example, some restrictions on the foreign content of cars that are imported into the US. After all, a restriction similar to this was in place before NAFTA came into force. He could also direct the Commerce Department to be much more aggressive in considering complaints made by US companies about ‘unfair’ trade practices from external competitors. Or he could direct the department to resolve cases more quickly. Neither of these examples would require congressional approval. As for tariffs, we would note that Trump’s choice to be Secretary of Commerce, Wilbur Ross, said in his recent nomination hearing that tariffs are not a first resort for addressing trade imbalances and unfair practices.

What’s he trying to achieve by saying the ‘One-China’ policy is up for negotiation?

I think he’s willing to accept some disruption of normal relations in order to achieve some economic ends. What we don’t know is how far he’s willing to go. In the last 20 years or so, when the US has had a rough patch with China on various strategic issues, both countries have been able to fall back on a fairly stable economic relationship. But Trump has repeatedly accused China of engaging in all sorts of unfair practices to gain advantage over US companies. Some of those practices skirt with the World Trade Organisation’s guidelines. And Trump wants to level that field. But the specific mechanisms available to a president, such as the trade-complaint process I discussed previously, do not move quickly and are unlikely to grab the headlines.

He has already called China a currency manipulator on Twitter. However, you need to distinguish between one of his tweets and the Department of the Treasury making a formal finding of currency manipulation. The former does not mean the latter is going to happen.

Are we heading for a trade war?

Trump is thinking about these multiple issues at the same time. He’s clearly interested in changing the status quo with respect to China. But the goals have to do with improving jobs in the US and creating what he sees as a more level playing field for US goods with the rest of the world. Unlike previous presidents, he is willing to approach this objective unconventionally. His style is to create a lot of uncertainty and he then negotiates to his advantage, and that certainly seems to be happening with respect to China.

We don’t think he wants to create a trade war just for the sake of it. His willingness to be unconventional is a means to an end. If he can improve market access for US goods without doing something as destructive as a trade war, we believe that would always be his first choice. But we also don’t know how far he’s willing to go. His informal communications have been quite provocative.

The US Congress has delegated a fair amount of power to the president on trade issues. But a lot of that power has to do with temporary relief. It would require congressional action to permanently impose broad tariffs.

The tariff authority granted to a president is usually for six months or so. So it’s important that while we acknowledge that his delegated authority is substantial, it is not limitless. I don’t think he can completely change the trade landscape on his own. Whether he could persuade Congress to back him in such an effort remains unclear.

Speaking of Congress, the Founding Fathers of the Unites States designed the Senate in such a way as to discourage hasty action. George Washington famously said: “We pour legislation into the senatorial saucer to cool it”. Indeed, it excels at that. The Senate has a number of arcane rules. One of them has to do with how you pass laws. The first route to passing legislation is via a so-called cloture vote. Under most circumstances, a cloture vote is necessary to end Senate debate and proceed to a final vote. Without cloture, you can simply talk a bill to death – a so-called filibuster. The problem is that in order to pass laws in this way you need 60 per cent of the votes. In other words, cutting off debate via a cloture vote will require some sort of deal-making.

But not all legislation is subject to a cloture vote. There are certain types of legislation with budget implications that can be passed on a fast-track legislative process called reconciliation. This allows a bill to pass the Senate in a limited time period, with the support of a simple majority – in other words 51 Senators.

A lot of legislation related to spending and budget can be passed under reconciliation. But tariffs cannot. So getting Congressional approval for tariffs will be impossible without Democrat support.

It is necessary to understand there are some areas where Trump is going to need Democratic votes. But it’s equally important to understand where consensus is going to be among Republicans. For example, there’s a lot of discussion right now on the potential for a border-adjustable tax, which would be a quite dramatic reorientation of US business taxation.

In order to think about the prospects for that passing in Congress, you need to ask where the consensus is among Republicans, especially in the Senate. It’s not enough for someone to say it doesn’t matter what Democrats think because such and such could be passed under the reconciliation mechanism. We have to secondly look to see if there’s consensus or not among Republicans.

As far as tariffs are concerned, or on a so-called border-adjustable tax, I don’t think a consensus has been sought yet, but I’d be surprised if there were one. That’s not to say you couldn’t find a consensus, but it’s not going to be straightforward.

What’s the likely direction of US foreign policy: is Trump going to be isolationist or interventionist?

It’s impossible to pigeonhole him. In some areas he seems willing to project US power; in others he seems willing to do the opposite. His attitude to NATO, for example, remains to be fully fleshed out. Although he has made comments about it being obsolete, his Secretary of Defense has said just the opposite. The US cannot withdraw from NATO without the approval of Congress, but at the same time, it could reallocate defence spending away from Europe and in that way reduce support for the organisation.

Despite the protectionist rhetoric, is there any real possibility the US would abandon its position as leader of the free world and let China and others fill the vacuum?

Trump wants to get a better deal on the economic front, but it remains to be seen what price he is willing to pay in order to achieve this goal in terms of lost strategic influence. The US is comfortable viewing itself as the world superpower. But that has costs associated with it. There’s a lot of free-riding associated with it; for example, US taxpayers’ spending on defence is quite extraordinary relative to the rest of the world.

Trump has said the US taxpayer hasn’t been getting a great deal. But we don’t know at this point the terms he would see as a good-enough deal.

Are there going to be sufficient calm heads to urge caution in the event we see tensions rising?

If you look at his likely Secretary of the Treasury, his Secretary of Defense and his Secretary of State, these are people who have had a lot of responsibility in their lives, have operated in a pressure-cooker environment and are very cool operators. Whether one agrees with their views or not, their experience is not contestable. As long as Trump uses that expertise, I think calm heads will prevail.

However, we do not know the working relationship Trump will have with his cabinet – they are just beginning to operate and it is too early to draw conclusions. It is clear some of Trump’s White House advisors have less experience at executive-level government management. And they have little experience of working in the collaborative environment that is typical of modern White House management, in which experts defer to each other. They may be quite accomplished, but it’s far from clear how they will operate.

What is his attitude likely to be towards Russia and the Middle East?

Within the US and even among people who have been nominated to be in his cabinet there is a tremendous lack of trust about Russia’s motives and tactics. I would be surprised to see a complete rapprochement with Russian President Vladimir Putin.

As for the Middle East, it is clear Trump is willing to let other actors such as Putin play out their game more in the Middle East. To that extent, he’s in tune with the electorate whose appetite for military operations in the region is extraordinarily weak. And so, despite some indications to the contrary, I don’t think he’s going to try to change the multi-lateral deal with Iran.

What’s the likely impact of a Trump presidency for institutions like the Federal Reserve and the Securities and Exchange Commission?

In his first year and a half in office Trump will have the opportunity to appoint new heads of more than half of the financial regulatory agencies. By the second half of 2018 there will be new people at the Fed, the SEC, the CFTC, the FDIC, probably at the consumer financial protection bureau, as well as the Treasury. Through these appointments we’ll see the extent to which he wants to change the financial regulatory landscape.

That said, there’s already a fair amount of bi-partisan agreement that those large banks that are not terribly complex or systemically important should have some form of regulatory relief. That could perhaps be in the form of lower capital requirements and perhaps less burdensome compliance requirements. There is some support for that in the Federal Reserve. We’re talking about what we call here large community banks. But there’s much less consensus on some other changes such as the Volker rule.

The regulatory burden in the US is a function of both the written regulations and the way regulation is practised. When the supervisor shows up at a given institution, the rules may be applied differently according to who that supervisor is. By having this opportunity to change the heads of many financial regulatory agencies in the first half of his term, Trump can impact regulatory and supervisory practice. And that’s a lot easier than repealing the Dodd-Frank act.

He’s vowed to spend a lot of money on infrastructure. Is that going to be achievable?

It’s not impossible, but just like any new president Trump has a long list of things he wants to do. You have to wonder what is going to be at the top of his list. We believe for the incoming Trump administration and the Republican Congress there is a priority to cut taxes and to spend more on defence, as well as to repeal and replace Obamacare. There is also an interest in spending more on public infrastructure, but it is our assessment that infrastructure is not at the head of the queue. Sequencing matters, when there is limited time and money. For example, the congressional committees of jurisdiction for repealing and replacing many critical parts of Obamacare are the same committees that will take up tax cuts and tax reform. By the time we get to infrastructure it may be next year, and the congressional appetite for a lot of direct federal spending may have been lessened by the increase in the deficit because of tax cuts and increased defence spending.

There is a core of Republican lawmakers who remain sceptical of deficit spending, but experience suggests a Republican congress usually gives a Republican president a fair degree of discretion, at least in the beginning.

Important Information

For professional/institutional/wholesale/qualified investors only. Not to be distributed to, or relied on by retail investors.

Unless stated otherwise, any sources and opinions expressed are those of Aviva Investors Global Services Limited (Aviva Investors) as at 26 January 2017. This commentary is not an investment recommendation and should not be viewed as such. They should not be viewed as indicating any guarantee of return from an investment managed by Aviva Investors nor as advice of any nature. Past performance is not a guide to future returns. The value of an investment and any income from it may go down as well as up and the investor may not get back the original amount invested.

Aviva Investors Global Services Limited, registered in England No. 1151805. Registered Office: St Helen’s, 1 Undershaft, London EC3DQ. Authorised and regulated by the Financial Conduct Authority and a member of the Investment Association.

This article is being circulated by way of an arrangement with Aviva Investors Asia Pte. Limited and its subsidiaries Aviva Investors Securities Investment Consulting Co., Ltd. and Aviva Investors Pacific Pty Ltd (“Aviva Investors Asia”) for distribution to investment professionals only. Please note that Aviva Investors Asia does not provide any independent research or analysis in the substance or preparation of this document. Recipients of this document are to contact Aviva Investors Asia in respect of any matters arising from, or in connection with, this document.

Issued by:

Aviva Investors Asia Pte. Limited, a company incorporated under the laws of Singapore with registration number 200813519W, holds a valid Capital Markets Services Licence to carry out fund management activities issued under the Securities and Futures Act (Singapore Statute Cap. 289) and is an Exempt Financial Adviser for the purposes of the Financial Advisers Act (Singapore Statute Cap.110). Registered Office: 1 Raffles Quay, #27-13 South Tower, Singapore 048583.

Aviva Investors Pacific Pty Ltd, a company incorporated under the laws of Australia with Australian Business No. 87 153 200 278 and Australian Company No. 153 200 278, holds an Australian Financial Services License (AFSL 411458) issued by the Australian Securities and Investments Commission. Business Address: Level 50, 120 Collins Street, Melbourne VIC 3000, Australia.

Compliance Code: 20170202_02

Mary Rosenbaum

Managing Director, Observatory Group, Washington D.C.

Ms. Rosenbaum leads the analysis of US monetary and fiscal policies and runs the Washington office of Observatory Group. Before co-founding Observatory Group, she ran the Washington office of the G7 Group. Prior to joining G7 in 2004, she was an economic advisor with McKinsey & Company, where she served as a macroeconomic advisor to consulting teams in Europe, Latin America, and the US. Before McKinsey, Mary was Vice President and Senior Economist at the Federal Reserve Bank of Atlanta, where she served as monetary policy advisor to the Bank's president while also directing the Macropolicy Group responsible for domestic and international economic analysis and econometric forecasting. Currently Mary also serves on the Executive Board of the Western Economic Association International. She holds a B.A. in Economics from The George Washington University and an M.A. and M.Phil in Economics from Columbia University.